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# A 5-year investment note offers a 10% return

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Manager
Joined: 11 Aug 2012
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Schools: HBS '16, Stanford '16
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A 5-year investment note offers a 10% return [#permalink]  25 Dec 2012, 14:54
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60% (03:15) correct 40% (02:13) wrong based on 77 sessions
A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a $500 penalty for early redemption, and the note is redeemed for$6430 after the second year, what was the original purchase price?

A. $6,000 B.$ 6,048
C. $6,100 D.$ 6,150
E. $6,200 I don't understand when the question says: "A 5-year investment note offers a 10% return on purchase". Here, I think that the note pays the 10% at the end of the five years. So, if the note is sold in the second year, the interest will be Capital*0.10*(2 years / 5 years). In addition, the phrase "a compounding 5% for each year after the first" doesn't indicate that that amount will be calculated after the capitalization of the original 10%. I say this because, according to the OE, this is the solution: P*1.1*1.05 - 500 = 6430 P is the original Price. IMO, this question is not good at all. What do you think? Do you expect something like this in the real GMAT? Does it worth the time of studying it? Thanks! [Reveal] Spoiler: OA  Kaplan GMAT Prep Discount Codes Knewton GMAT Discount Codes Veritas Prep GMAT Discount Codes Verbal Forum Moderator Status: Preparing for the another shot...! Joined: 03 Feb 2011 Posts: 1423 Location: India Concentration: Finance, Marketing GPA: 3.75 Followers: 144 Kudos [?]: 769 [4] , given: 62 Re: A 5-year investment note offers a 10% return [#permalink] 25 Dec 2012, 22:18 4 This post received KUDOS Expert's post danzig wrote: A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a$500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price? A.$ 6,000
B. $6,048 C.$ 6,100
D. $6,150 E.$ 6,200

Hii danzig.
Since the note was redeemed after 2 years, so a penalty of $500 has to be submitted. So the amount that is redeemed after 6430 is after the deduction of$500.
Hence the amount after being compounded is 6930.
Let the initial amount be P.
After the return, the amount becomes 1.1P.
Now use this 1.1P as the principle in the compound interest formula to get the amount 6930.
$$A=1.1P(1+5/100)$$
where A=6930.
Therefore, use
$$6930=1.1P(1+5/100)$$ to get P as $6000. Hope that helps. _________________ Manager Joined: 04 Oct 2011 Posts: 224 Location: India Concentration: Entrepreneurship, International Business GMAT 1: 440 Q33 V13 GMAT 2: 0 Q0 V0 GPA: 3 Followers: 0 Kudos [?]: 30 [1] , given: 44 Re: A 5-year investment note offers a 10% return [#permalink] 07 Jan 2013, 21:51 1 This post received KUDOS Marcab wrote: danzig wrote: A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first. If there is a$500 penalty for early redemption, and the note is redeemed for $6430 after the second year, what was the original purchase price? A.$ 6,000
B. $6,048 C.$ 6,100
D. $6,150 E.$ 6,200

Hii danzig.
Since the note was redeemed after 2 years, so a penalty of $500 has to be submitted. So the amount that is redeemed after 6430 is after the deduction of$500.
Hence the amount after being compounded is 6930.
Let the initial amount be P.
After the return, the amount becomes 1.1P.
Now use this 1.1P as the principle in the compound interest formula to get the amount 6930.
$$A=1.1P(1+5/100)$$
where A=6930.
Therefore, use
$$6930=1.1P(1+5/100)$$ to get P as \$6000.
Hope that helps.

Hi Marcab,
Why u have used 1.1P ?
10% interest is for 5 yrs right?
He took in 2 yrs then how come?
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Status: Preparing for the another shot...!
Joined: 03 Feb 2011
Posts: 1423
Location: India
Concentration: Finance, Marketing
GPA: 3.75
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Kudos [?]: 769 [1] , given: 62

Re: A 5-year investment note offers a 10% return [#permalink]  07 Jan 2013, 22:26
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Expert's post
Hii Shan.
Quote:
A 5-year investment note offers a 10% return on purchase, and a compounding 5% for each year after the first.
For first year, the simple interest rate is 10% and for the subsequent years the compond interest rate is 5%.
Thats why I took 1.1P after 1st year.
Hope that helps.
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Joined: 21 Aug 2013
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Re: A 5-year investment note offers a 10% return [#permalink]  09 Apr 2014, 07:37
Hi Bunuel,
Which is the fastest method to do these kind of questions.
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Re: A 5-year investment note offers a 10% return   [#permalink] 09 Apr 2014, 07:37
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